Wednesday, November 30, 2011

AMR Bankruptcy/Fitch on U.S. Debt/Bought 1 ArvinMeritor 10.625% Senior Bond Maturing on 3/15/2018 at 96/Bought 100 of CHW at $7.18

Fitch completed its most recent review of U.S. debt. WSJReutersCNBC Fitch changed the outlook to negative from stable and warned that its rating would be downgraded without a credible plan to tackle the nations deficit by 2013. I do not see Congress coming to such an agreement during 2012.

According to Bloomberg, Moody's has placed under review the subordinated debt from European banks for a possible downgrade.

A report at Bloomberg claims that Hank Paulson gave hedge fund managers non-public material information about the government's plan to wipe out the common and equity preferred shareholders of Fannie Mae and Freddie Mac.

1. Bought 1 ArvinMeritor (now Meritor) 10.625% Senior Bond Maturing 3/15/2018 at 96 Last Monday (Junk Bond Ladder Strategy)(see Disclaimer): Meritor's stock is publicly trade under the symbol MTOR. The current consensus E.P.S. estimate for the F/Y ending September 2012 is $1.41. MTOR Analyst Estimates For MTOR's 4th fiscal quarter, ending 9/30/11, the company reported net income of 38 million from continuing operations (excluding a loss of 7 million from discontinued operations). Revenues rose to $1.217 billion from 941 million in the year ago quarter. Adjusted EBITDA was $97 million, up $22 million from the same period a year ago. Free cash flow was $23 million for the quarter. As of 9/30/11, the company had $217 million in cash. Long term debt stood at $950 million.

Morningstar currently rates CHW at three stars. The average three year discount according to Morningstar is -12.84, so it is not unusual for this fund to sell at over a 10% discount to its net asset value.

On 11/27/2011, the closing share price was $7.05, with the net asset value per share at $8.23, creating a discount to net asset value of -14.34% as of that date. On Monday, the day of my purchase, CHW closed at $7.19, with a net asset value of $8.49, creating a discount of -15.31. Yesterday, the fund closed at a -15.57 discount to its $8.54 per share net asset value.

The current monthly dividend is 5 cents per share. Assuming a continuation of that rate, the yield would be around 8.33% at a total cost of $7.18.

CHW page at the Closed-End Fund Association. This is not a serious buy. Possibly, I am being too pessimistic about the near term future of the market, so I bought a 100 shares of this balanced fund that pays a good dividend.

3. AMR Files for Bankruptcy (own 1 bond): The news release by American Airlines states that the company "begins legal process in United States to improve competitiveness". SEC Filed Press Release This bankruptcy filing was not a surprise after the pilots union refused to submit a generous offer to their members for a vote. AMR Bankruptcy? AMR has the highest labor costs among the major airlines. While AMR has been negotiating with the major unions since 2006, it has not been successful. BusinessWeekNYT I would now expect significant jobs cuts during the reorganization.

I will not include my loss in Realized Gains Junk Bond Ladder Strategy until I am able to quantify it. I have no idea what I will receive in exchange for my one senior bond. One possibility would be the receipt of common stock when and if AMR emerges from bankruptcy. Sometimes, stock warrants are also given in addition to shares of common stock in the reorganized company. Another possibility might be an exchange for another bond with a different maturity, lower principal amount and/or lower coupon. A total wipe out is also possible. I expect a significant percentage loss on this one bond position. The 2016 unsecured senior AMR bond was trading yesterday mostly in the 10 to 20 range. Fitch opined yesterday that the unsecured senior note owners will likely recover next to nothing. Bloomberg I see no reason to disagree with that assessment.

AMR's common shares made a race toward zero in yesterday's trading. Generally, the existing common shares are cancelled during a bankruptcy and become worthless. I do not own, and have never owned the common shares. I mentioned in an earlier post that Morningstar anticipated this bankruptcy and had reduced its price target for the common shares to zero.

While the expected loss on my 1 AMR bond position is not material, it did provoke an admonition by Headknocker and a trading rule change from our Great Leader.From this point forward, when the LB assigns an extreme risk rating on a bond (i.e. 8 or higher), the purchase price can not be above 50% of par value. In addition, no Head Trader shall ever again buy any security issued by an airline, even secured debt.
LB pointed out that the Old Geezer was without question responsible for this one bond purchase. Bought 1 AMR 9% Senior Bond Maturing 9/1/5/2016 at 99.375 As shown in that post, LB called the OG a nitwit for even considering the purchase of this bond.

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About Me

I am no longer in a capital accumulation phase. My key investment objectives are capital preservation and income generation.
I started to buy stocks in the late 1960s.
I have a balanced worldwide portfolio with a considerable allocation to cash. Starting in December 2016, I started to reallocate out of cash and into high quality short and intermediate term bonds and FDIC insured CDs using a ladder strategy.
I have been paring my stock allocation, selling gradually into the robust stock market rally occurring since the U.S. election.
In this blog, I will be discussing only a sample of my recent stock trades. I will be discussing almost all of my bond and CD trades.

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Disclaimer

I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this blog, I am acting solely as a financial journalist focusing on my own investments. The information contained in this blog is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this blog is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. For purchases of bonds and preferred stocks, the prospectuses need to be reviewed until fully understood by the investor.